Efficiency

Question 1

describe allocative efficiency

Answer 1

• a market condition where the production of goods and services matches consumer demand
• demand=supply in a market
  = society surplus maximised @ this point, where AR=MC
• means resources follow consumer demand
  = get exactly what they want @ right price
  = increase choice and decrease price= max consumer surplus
• allow producer to retain market share by staying ahead of rivals

Question 2

describe productive efficiency

Answer 2

• where output is maximised @ lowest possible AC
  = fully exploit EoS
• where MR=AC= lowest point on AC
• if low price passed onto consumers increases consumer surpluses
  = due to full exploitation of EoS and firms operating @ min AC

Question 3

describe dynamic efficiency

Answer 3

• reinvesting supernormal profit into R and D r other innovative methods in order to decrease LRAC over time
• through re-investing, consumers get new innovative products to increase choice of goods in LR
• over time consumers get low prices due to new capital, tech and production methods like machinery
  = decrease AC for producer= translate to low price for consumer

Question 4

describe x-inefficiency

Answer 4

• happens when a lack of effective / real competition in a market or industry means that average costs are higher than they would be with competition
• production w no waste
  = minimise costs for firms= decrease prices for consumers
  = increase consumer surplus
• low cost= high profit for firms= decrease price for consumers

Question 5

describe static efficiency

Answer 5

• describes level of efficiency @ one point in time